General

Key commercial aspects

Describe, in general terms, the key commercial aspects of the oil sector in your country.

According to the Oil and Gas Authority (OGA), the UK’s oil & gas industry regulator, as of the end of 2018, almost 45 billion barrels of oil equivalent had been recovered from the UK continental shelf (UKCS). The OGA estimates that a further 10 to 20 billion barrels of oil equivalent could still be recovered from the UKCS. Production from the UKCS peaked in 1999, reaching 137 million tonnes. This was followed by a general decline, with production falling by 5 per cent each year on average. 2018 bucked this trend, with oil and gas production increasing more than 4 per cent from 2017, averaging 1.7 million barrels of oil equivalent per day (Mmboe/d), before dropping to 1.61Mmboe/d in 2020. The OGA predicts production to decline further in 2021 and 2022, anticipating a fall to 1.50 Mmboe/d and 1.44 Mmboe/d respectively. This reflects lower levels of brownfield and greenfield investments, and also takes into account the impact of planned maintenance works due to be carried out. In 2020, UKCS oil production fell to 0.93Mmbbl/d, a decrease of 15.5 per cent from 2019. Gas production remained at 0.58boe/d. Gas production is expected to decline to 0.41boe/d by 2025.

Drilling activity across the UKCS fell by almost one-third between 2015 and 2016. Activity remained low in 2017, with only 71 development wells being drilled. This picked up slightly in 2018 and 2019, recovering to 9 per cent below 2015 levels with 141 wells drilled (112 development, 16 exploration and 13 appraisal). In 2020, 71 wells began drilling on the UKCS. These consisted of seven exploration wells (the lowest since 1965), 2 appraisal wells (the lowest since 1970), and 62 development wells (the lowest activity levels since 1976). The 2020 levels were half the levels seen in 2019 as companies deferred and cancelled activities to preserve cash and reduce operational risk, due to the impact of the Covid-19 pandemic and the oil price crash. Oil & Gas UK (OGUK), the leading industry-representative body for the UK offshore oil & gas sector, predicts a small increase in activity in 2021, with a further potential to increase in 2022 to the levels seen between 2016 and 2018.

The UK has the sixth-largest total refining capacity in Europe and some of its six crude oil refineries are among the largest in Europe. The refining business has experienced several disruptions, including the sale of three refineries in 2011, the closure of the Coryton refinery in 2012 and the closure of the Milford Haven refinery in late 2014. Production of petroleum products by refiners decreased by 4.5 per cent after the first quarter of 2020 compared with 2019. Only two new projects were approved for development by the OGA in 2020 — Wintershall’s Sillimanite field and IOG’s SNS cluster development of the Blythe, Elgood and Southwark fields.

Before the impact of the covid-19 pandemic hit, with stable market conditions expected, it was anticipated that capital investment in 2020 would be in the region of between £5 billion and £5.5 billion, in line with the 2019 levels. However, this fell by 33 per cent to £3.7 billion in 2020 as a result of activity deferrals and cancellations. An immediate rebound is not expected in 2021, and capital expenditure is anticipated to remain between £3.2 billion and £3.7 billion. OGUK now estimates that in the region of £3 billion of previously expected capital investment has been deferred in 2020 and 2021.

There was a 10 per cent decline in operating costs expenditure in 2020 to £6.6 billion (compared with £7.3 billion in 2019), as companies deferred some offshore activities and reduced offshore personnel levels by around one-fifth to reduce covid-19 exposure risk. 

Production tax receipts returned to positive figures in the 2017/18 and 2018/19 tax years, with Her Majesty's Revenue and Customs generating £1.25 billion and £1.28 billion in those years respectively, having paid out £294 million on a constant currency basis in 2016/17. In those two more recent tax years, production tax receipts represented 0.21 per cent of all receipts. The Office for Budget Responsibility forecasts that net production tax payments will amount to £300 million in the financial year 2020/21, adding to contributions of more than £41 billion since 2010 and almost £360 billion since 1970 (in real terms). This tax take represents more than 55 per cent of the total cash flow generated from UKCS production to date.

In 2019, the industry supported around 270,000 jobs; however, the covid-19 pandemic has caused a downturn in this figure over the last year. There are a number of factors, such as the Job Retention Scheme, which are helping to sustain jobs that would have otherwise been lost, resulting in some disconnect between levels of activity and investment and employment levels. 

OGUK predicts up to eight new fields will commence production in 2021. OGUK estimates these could produce around 250 million boe over field life. However, given the recent lower rates of new investment, it is expected that there will be less production coming on stream in the next year. New fields gaining regulatory approval in 2020 unlocked 40 million boe of new resources, which is less than one-third of the approvals obtained in 2019 and 85 per cent lower than in 2018. 

The OGA announced the North Sea Transition Deal on 24 March 2021. It sets out plans incrementally to decarbonise the North Sea Energy oil and gas sector, complying with the government's net zero emission agenda. The UK government and oil and gas sector plan jointly to invest up to £16 billion, including the replacement of the fossil fuel-based power supplies, on oil and gas platforms with renewable energy by 2035. 

Energy mix

What percentage of your country’s energy needs is covered, directly or indirectly, by oil or gas as opposed to nuclear or non-conventional sources? What percentage of the petroleum product needs of your country is supplied with domestic production?

With respect to domestic production, according to statistics published in 2020 by the Department of Business, Energy and Industrial Strategy (BEIS), oil represented 44 per cent of the UK’s energy production in 2019: 

  • natural gas: 29 per cent;
  • coal: 1 per cent;
  • bioenergy and waste: 11 per cent; and 
  • electricity: 15 per cent (consisting of wind, solar, natural-flow hydro and nuclear).

 

According to statistics published in 2020 by BEIS, oil represented 36 per cent of the UK’s energy usage in 2019: 

  • natural gas: 40 per cent;
  • coal: 3 per cent;
  • bioenergy and waste: 10 per cent; and 
  • electricity: 11 per cent (consisting of 6 per cent nuclear, 4 per cent renewables and 1 per cent imports).

 

The UK is now a net importer of all main fuel types, although it remains a net exporter of some products such as motor spirit. In 2019, 28 per cent of oil used and 49 per cent of gas used was imported. In 2020, imports and exports of primary oils were down 23 and 12 per cent respectively, as global trade and shipping reduced. This follows several years of growth since 2014 after renewed investment into several large projects on the UKCS. The UK was a net importer of primary oils by 0.8 million tonnes

For 2018, the contribution by the energy industries to the UK economy was 3.2 per cent of gross domestic product (GDP) (0.3 percentage points higher than the previous year). Of the energy total, oil and gas production contributed to over one-third of the energy sector’s total contribution and 1.2 per cent of overall UK GDP (around £24 billion). 

Government policy

Does your country have an overarching policy regarding oil-related activities or a general energy policy?

The Energy Act 2010, which became law in April 2010, implements some of the key measures required to deliver the UK government’s low carbon agenda. It includes provisions for delivering a programme for carbon capture and storage and for implementing mandatory social price support. It also introduces a number of measures aimed at ensuring that the energy markets are working fairly for consumers and are delivering secure and sustainable energy supplies. However, it was the Energy Act 2008 that enshrined the UK’s present policy for the energy sector. The primary aim of the government in passing the 2008 Act was to tackle climate change, reduce carbon dioxide emissions and ensure secure, clean and affordable energy. The Energy Act 2008 also provided a regulatory framework for offshore gas storage, introduced changes to the offshore oil and gas decommissioning regime and extended third-party access to upstream oil and gas infrastructure. The government has, over a number of years, encouraged smaller companies to apply for licences in the UKCS and has made a concerted effort to maximise recovery of oil from the UKCS through initiatives such as the fallow acreage initiative and the Code of Practice on Access to Upstream Oil and Gas Infrastructure on the UKCS (Infrastructure Code of Practice (ICOP)). This policy was given further standing when the Energy Act 2011 was enacted, providing for the secretary of state to enforce access to upstream infrastructure on behalf of an applicant. Since the publication of the Wood Review in 2013, there has been a further shift in government policy towards maximising the recovery of hydrocarbons from the UKCS through the government entering into consultation with the industry.

The Energy Act 2016, which received royal assent in May 2016, formally established the OGA with the Secretary of State for BEIS as the sole shareholder, to replace the Department for Energy and Climate Change (DECC) as the entity responsible for petroleum licensing and regulation of the upstream oil and gas sector. The 2016 Act also enables a more comprehensive charging of the offshore oil and gas industry for permits and licences for environmental and decommissioning activity.

In addition, the Climate Change Act 2008 introduced the world’s first long-term legally binding framework to reduce greenhouse gas emissions and set carbon budgets. Separate additional legislation, the Climate Change (Scotland) Act 2009, is also in place. Also of relevance in terms of greenhouse emissions is the Greenhouse Gas Emissions Trading Scheme Order 2020 as amended. This sets out the framework of the UK Emissions Trading Scheme (ETS), which replaced the UK’s participation in the EU ETS on 1 January 2021 following the UK’s exit from the EU. The new UK ETS closely follows the EU ETS and provides a carbon pricing mechanism as a tool for achieving the UK's net zero emissions target by 2050. More recently, mandatory reporting requirements were introduced for quoted companies incorporated within the UK to disclose details of their greenhouse gas emissions in their directors’ report or in a stand-alone strategic review.  In addition, the Energy Savings Opportunity Scheme Regulations (ESOS) 2014 were introduced to implement article 8 of the Energy Efficiency Directive 2012/27/EU. The 2014 Regulations remain UK law. ESOS requires relevant undertakings (as defined in the legislation) and their corporate groups to undertake mandatory energy assessments by 5 December 2015 and every four years thereafter if they continue to qualify.

The OGA’s North Sea Transition Deal details how the oil and gas industry in the UK can play its part in the climate emergency. This underscores the UK government’s commitment to transition to net zero by 2050, and sets out some key messages in the run up to COP26. 

Registering a licence

Is there an official, publicly available register for licences and licensees? Is there a register setting out oilfield ownership or operatorship, etc?

The OGA has disabled its previous online register of all existing licences and their respective licensees (the Oil and Gas Portal, latterly the Energy Portal), in favour of a new open data platform. Like the Oil and Gas Portal, the new platform is publicly accessible at no cost. However, the OGA does not accept any responsibility for the accuracy of the information on its website and does not accept any liability as a result of reliance upon such information. There is a process of checking the accuracy of the published data upon lodging any assignment.

The OGA also maintains an index setting out oilfield ownership, operatorship and production, which is publicly accessible at no cost through its website at https://www.ogauthority.co.uk/site-tools/site-index/.

However, as with licences and licensees, the OGA does not accept any responsibility for the accuracy of the information provided, and reports that anyone relying on the information does so at their own risk.

Legal system

Describe the general legal system in your country.

The legal system in England and Wales, Scotland and Northern Ireland is one of the oldest and most established legal systems in the world. As such, many international agreements are governed by English law. The legal system is based on a well-established common law system that has been developed through the years by the courts and the creation of case law, which sets out tests and interpretative procedures that should be followed when determining the meaning of contracts. There is a well-developed appeals procedure from the High Court, to the Court of Appeal and finally to the Supreme Court, which is also the final appeal court in many other jurisdictions around the world. The judiciary maintains its independence from the government and, as such, is able to uphold the rule of law at all times.

Regulation overview

Legal framework for oil regulation

Describe the key laws and regulations that make up the principal legal framework regulating oil and gas activities.

The Petroleum Act 1998 governs oil and gas exploration and production activities in the UK. The Act vests ownership of petroleum in the UK continental shelf (UKCS) in the Crown and empowers the Secretary of State to grant licences for the exclusive right to search for, bore for and extract petroleum in the area covered by the licence. Licences are acquired through competitive licensing rounds held each year by the Oil and Gas Authority (OGA). For the most recent Licensing Round (32nd), on 3 September 2020, the OGA offered for award 113 licence areas over 260 blocks or part-blocks to 65 companies. Following the 32nd round, the OGA will not run a licence round in the 2020/2021 period because of a temporary pause from annual licence round activity. 

A company will make (either by itself or as part of a joint venture) an application for a specific area. Licences may also be acquired through asset transfers between companies and the consent of the OGA is required prior to any licence assignment. The conditions of a licence (known as ‘model clauses’) are set out in secondary legislation, which for existing offshore production licences are the Petroleum Licensing (Production) (Seaward Areas) Regulations 2008. The model clauses set out in detail the conditions for the licence, including term, licence surrender, record-keeping, working obligations, appointment of operator, measurements and pollution. In awarding licences, the OGA must also comply with the Hydrocarbons Licensing Directive Regulations 1995, as amended by the Pipelines, Petroleum, Electricity Works and Oil Stocking (Miscellaneous Amendments) (EU Exit) Regulations 2018, which set out additional rules that must be followed when issuing petroleum licences. 

In August 2020, the Department for Business, Energy and Industrial Strategy (BEIS) announced it will review its policy on the future UK offshore oil and gas licensing regime as part of the wider aim of achieving net zero greenhouse gas emissions by 2050. In March 2021, BEIS confirmed that it would be introducing a new climate compatibility checkpoint before each future oil and gas licensing round to ensure licences awarded are aligned with wider climate objectives, including net zero emissions by 2050 and the UK’s diverse energy supply. The checkpoint will use the latest evidence, looking at domestic demand for oil and gas, the sector’s projected production levels, the increasing use of clean technologies such as offshore wind and carbon capture, and the sector’s continued progress against its emissions reduction targets.

If the evidence suggests that a future licensing round would undermine the UK’s climate goals or delivery of net zero, it will not go ahead. The government will design and implement the checkpoint by the end of 2021 through extensive engagement with a wide range of stakeholders.

In addition to the regulatory requirements, there are a number of voluntary industry-based codes of practice to which many UK continental shelf (UKCS) licensees have signed up to. ICOP is intended to facilitate access by a third party to oil infrastructure in the UKCS such that the parties involved can agree fair and reasonable terms. The fallow acreage initiative places pressure on licensees to deliver activity on old licences where companies have not been active for some time or relinquish licences in order for the acreage to be offered to other companies. With respect to transfers of licences, the Commercial Code of Practice establishes an agreed framework to minimise resources spent on negotiations and promote positive commercial behaviour.

The Bribery Act 2010 came into force on 1 July 2011 and created a number of offences including:

  • a number of general bribery offences;
  • the offence of bribing a foreign public official; and
  • the offence of a commercial organisation failing to prevent bribery on its behalf (this applies to any organisation that has business operations in the UK).
Expropriation of licensee interest

Are there any legislative provisions that allow for expropriation of a licensee’s interest and, if so, under what conditions?

At present, there are no legislative provisions that allow for the expropriation of a licensee’s interest. However, as the terms of a licence may be unilaterally altered by the government, any change in the law may allow for the expropriation of a licensee’s interest.

Revocation or amendment of licences

May the government revoke or amend a licensee’s interest?

The government can terminate licences for breach, and there is indeed a process of surrender, but otherwise there can be no amendment without agreement. A petroleum licence is an instrument (a mix of contract and regulation) between the licensee and the Crown, that can only be amended (or, absent a breach, terminated) by agreement (as held in R (Benjamin Dean) v The Secretary of State for Business, Energy and Industrial Strategy [2017] EWHC 1998 (Admin)). The court noted that the problems for offshore licensees – and the consequent need for flexibility – would be much greater, as their costs are typically an order of magnitude greater than those onshore. The fact that there were certain consent stages in an offshore licence, which must satisfy further regulatory requirements before certain works can begin (eg, environmental impact assessments), did not alter the nature of the grant of exclusive property rights by the Crown and the incidental power to amend the licence by agreement. The only restriction was that no agreed variation to the licence could override those further regulatory requirements.

Regulators

Identify and describe the government regulatory and oversight bodies principally responsible for regulating oil exploration and production activities in your country. What sanctions for breach may be imposed by the regulatory and oversight bodies?

Historically, DECC was the government authority primarily responsible for the development and regulation of the oil and gas industry in the UK. DECC was established in October 2008 following a transfer of powers from the Department of Business Enterprise and Regulatory Reform. On 1 April 2015, certain functions passed from DECC to the OGA, a newly created executive agency of DECC structured as a company owned by the Secretary of State. DECC’s role in licensing, exploration and development was transferred to the OGA, which is responsible for maximising the cost-effective recovery of oil and gas from the UKCS. In 2016, DECC was merged with the Department for Business, Innovation and Skills. In their place, BEIS was created.

In the event that a licensee breaches the terms and conditions of its licence, the OGA may revoke the licence and the rights granted under it (without prejudice to any obligations and liabilities owed by the licensee). The Energy Act 2016 introduced a right for the OGA to issue a sanction notice on a person that it considers has failed to comply with a petroleum-related requirement. Such a failure can include, inter alia, a failure to comply with the terms and conditions of an offshore licence. Prior to service of such sanction notice, the OGA must first serve a sanction warning notice (to include a specified period in which the recipient may make representations to the OGA). A sanction notice may take one of four forms:

  • an enforcement notice (requiring the recipient to comply with the terms specified in the notice);
  • a financial penalty notice (requiring payment of a fine not exceeding £1 million, although the Secretary of State reserves the right to increase such a limit to £5 million by way of new regulation);
  • a revocation notice (revoking the recipient’s licence); or
  • an operator removal notice (requiring a licensee to remove its operator).

 

If a recipient fails to comply with an enforcement notice, the OGA may serve one of the other sanction notices. A recipient may appeal a sanction notice on the basis that there was no failure by it to comply with the petroleum-related requirement or that the sanction given in the notice was unreasonable or not within the powers of the OGA. Sanction notices issued by the OGA may be published (subject to redaction of information that is commercially sensitive, not in the public’s best interest or inappropriate).

Other regulatory bodies include the Health and Safety Executive (HSE), which is responsible for health and safety, and the Hazardous Installations Directorate, which is responsible for regulating and promoting improvements in health and safety across the offshore oil and gas sector. The HSE may also impose sanctions for breach of health and safety regulations.

Government statistics

What government body maintains oil production, export and import statistics?

The Office for National Statistics is the central data source, where the statistics for oil production, export and import are produced to a high professional standard. Since March 2019, the OGA has also published its own information (known as Oil and Gas Authority Open Data), generated via the National Data Repository contributed to by licensees since February 2019.

Law stated date

Correct on

Give the date on which the information above is accurate.

24 April 2020.